Below you will find brief explanations into the different types of interest rates in the UK.
Standard Variable Rate
Payments coincide with the movement of the lender's own mortgage rate. This is mainly decided upon given the Bank of England's base rate. There are not usually any early repayment charges on a standard variable rate, which means that you have the freedom to use a different lender without incurring any financial penalties. You may also pay additional amounts to cut your interest costs, again without receiving any penalties.
In terms of cost flexibility, it is dependent upon the interest rate at that particular time. So, for example, if the interest rate increases, so do your monthly payments and vice versa. However, the lender does have to reduce the interest level immediately even if the Bank of England has done so.
Fixed Interest Rate
With this type of option, your payments are set at a certain level for a set period. When this period comes to an end, you will then more than likely be switched to the standard variable rate.
You will more than likely be liable for early payment charges during the set period and maybe even afterwards also. Again, it is advisable that the terms and conditions are read thoroughly beforehand.
With a fixed interest rate, your monthly payments will stay the same in the set period, even if interest rates go up. Therefore you have the peace of mind that there will be no increases and you can then plan accordingly. However, if the interest rate decreases, your payments remain the same. So, you would not benefit from this.
Tracker Rate
This is a variable rate loan, which has an interest rate that is at a set amount above or below the Bank of England’s rate or additional base rates. This is set independently by the lender. It then increases or decreases with that set rate.
There may be some early repayment charges with a tracker interest rate. Check the terms and conditions for further details. If your finances would not allow you to be in a position to be able to afford additional payments per month (if the interest rate increases) then other options may be better suited to your individual circumstances.
Discounted Interest Rate
You will find that with a discounted interest rate, your monthly payments may increase or decrease. However, this means that you then receive a discount on the lender's standard variable rate for a certain, set period of time. When the terms come to an end, you would then usually swap over to the standard variable rate.
You will more than likely be liable for early payment charges during the set period but by choosing this type of mortgage, it gives you a bit of breathing space to begin with, which many people find essential initially. However, after this period has come to an end, it is very important that you are able to then afford the increased monthly payments.
Capped Rate
Capped rate payments are variable and often linked to a base rate but they are fixed not to go above a set level during the set period of the deal. When it comes to the end of this period you will more than likely then be charged the lender’s standard variable rate. At the end of the period, you are usually charged the lender's standard variable rate
You will more than likely be liable for early payment charges during the set period and maybe even afterwards also.
This type of solution is ideal for those wanting the security of knowing that your payments will not increase above a certain level, whilst still being able to benefit if the interest rate decreases.
Collared Rate
This option may be used in conjunction with a capped rate and/or a tracker. All of your payments would be variable but will not fall below a set level. You will not usually be liable for any early repayment charges unless, of course, it is used alongside a capped rate and/or tracker rate deal.
